Public Bill Committee

[Frank Cook in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003) - Clause 147

Air passenger duty: class of travel with large seat pitch

Question proposed, That the clause stand part of the Bill.

Justine Greening: Since the clause was originally put into the Bill, we have been slightly overtaken by events on two fronts. First, we know that the air passenger duties that we currently have will be replaced by a per-plane duty at some point—I think in November 2009. We discussed that when we considered clause 146 last week.
Secondly, we know that, because of the rising oil price and other pressures on the industry, some of the key companies and business-only jets that the clause was aimed at are facing challenging circumstances. Some people would say that the Government are perhaps closing the stable door after the horse has bolted in that respect. Others may say that they are closing the stable door after the horse has died. Nevertheless, there are a few points I want to raise to get the Minister to talk a little more on record about the Government’s thinking and to clarify, in relation to the consultation document and the Government’s response to it, which option they are going for. My understanding is that it is option three, but it would be helpful for her to clarify that.
It seems a sensible step to amend the existing air passenger duty in this way, because the way in which the duty was structured meant that business-only flights were essentially able to have the duty charged at a reduced rate. The measure aims to ensure that they pay the standard rate.
I wanted to ask the Minister about the choice of 40 in for the seat pitch, at which seats can no longer be considered standard class. As she is aware, a number of airlines still have business class seats with pitches below 40 in. To give a few examples, Air Sahara, Aloha Airlines, Estonian Air, Icelandair, Jet Airways, Luxair—

Angela Eagle: The big boys.

Justine Greening: The Minister says, “The big boys.” Nevertheless these are still airlines that have business class seats with a pitch below 40 in. I wanted to ask her what the thought process was for the cut-off at 40 in rather than perhaps 38 in, which would have captured the overwhelming majority. Can she also clarify what the revenue impact of the clause is? My understanding is that, if we are looking at option three being implemented—perhaps she can confirm that—the revenue impact would be small. Unfortunately, given the demise of some of the business-only airlines recently, it could almost be negligible. The Government’s response to the consultation, published back in January of this year, said in paragraph 4.34 that the impact of introducing option three would be negligible and that, currently,
“only two of the 290 registered airlines provide a business class only service.”
Perhaps she can clarify whether either of those two airlines are still operating—otherwise, the clause becomes entirely academic. Obviously, the provisions that it brings forward will last only for 12 months while the per-plane duty comes in.
Those are the main questions. Perhaps the Minister could clarify whether, in the Treasury’s assessment, those business-only airlines that remain will have to bear any undue bureaucracy and administration as a result of the provision. Obviously, they will pay more tax, and I understand why the Government are bringing the clause forward, but, in the conditions of rising costs and challenging economic circumstances which all companies are facing at the moment, we do not want to put any additional pressures on them unnecessarily. At the end of the day, they are employing people and generating work in our economy.

Peter Bone: It is a pleasure to serve under your chairmanship, Mr. Cook. I would like to declare two interests: the first is recorded in the Register of Members’ Interests and the second is that I am rather tall. This measure is an attack on tall people and it will discriminate against them—if only my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski) were here. This is a nasty tax. It has always been simply a tax and has never been a green or environmental tax. I know that the Government realise that and will abolish and change it, but it seems rather strange to alter the rules now for business-only carriers. As far as I am aware, business-only carriers have gone out of business in this country, so I would be interested to learn which of those businesses are still flying.
The intention behind this tax is to catch business-only airlines, but it will of course catch many others as well. If I want to fly and ask for an emergency exit seat so that I have more leg room, will I now have to pay double the airport duty tax because the seat immediately in front of me is more than 40 in away? What about occasions when an airline is overbooked and puts economy passengers in business class or premium economy? More passengers would get on the plane, which is what the Government say should happen, but will they be asked to pay double the air passenger duty?
Many economy airlines want to have a seat pitch of more than 40 in because one of the obvious ways of avoiding deep vein thrombosis, which is an important issue, is to have a larger seat pitch so that people can exercise while in their seats. Therefore, everything that the Government are doing with regard to this tax is wholly wrong. As my hon. Friend has said, it is closing the door after the horse is dead. It is an attack on tall people and it will discourage airlines from flying at full capacity and economy airlines from increasing seat pitch.
In America, some economy airlines have a larger seat pitch as a selling point because of the problems with cramped conditions and deep vein thrombosis, but we are discouraging companies such as EasyJet and Ryanair from doing likewise. This change cannot have any significant revenue implications, and it must have been thought up in an office in Whitehall by a bureaucrat who knows nothing about the aviation industry.

Peter Viggers: I take an interest in flying matters, and I think that I am the only qualified fast jet pilot in the House. When I was a Minister in Northern Ireland, I flew 400 times between London and Belfast in three years, and I once worked out that I have spent six months of my life in the air. I do not understand how the clause came to be put forward, as it is remarkably unsophisticated to concentrate only on pitch. If one were genuinely trying to introduce environmental aspects into the cost of air travel, one ought to take into account the height and width of the cabin and the width, as well as the pitch, of the seat. If one were seriously trying to introduce an environmental aspect and cut back on air travel, one would have thought that it was possible to produce a far more sophisticated measure, such as a comparison between the weight of the passengers in an aircraft and the weight of the aircraft. I will be interested to hear how the Exchequer Secretary will explain and defend the clause.

Angela Eagle: I will seek to deal with some of the issues that have been raised. We seem to be in an interesting situation. The hon. Member for Putney said she is broadly in favour of the clause, but complained about aspects of it. The hon. Member for Wellingborough, albeit that he is very tall, is in complete revolt against the clause and the hon. Member for Gosport gave a more measured contribution. He was quite right to ask some technical questions. Before Committee members get carried away with the idea that this is some bureaucrat’s plan gone mad and that somebody in Whitehall is thinking of ways to tinker with taxes just for the sake of it to justify their own existence, I tell them that this issue was raised by the industry as part of the 2006 pre-Budget report process.
The industry raised the issue with the then Financial Secretary, my hon. Friend the Member for Wentworth (John Healey), because it had concerns about the definitions of classes of travel. Those matched broadly the classes of travel marketed when they were introduced in 2001. Since then, developments in the industry have meant that definitions have created market distortions, particularly in the area of business class and premium economy class seating. The industry raised the issue with us, not the other way around. I hope that the hon. Member for Wellingborough will put away his rather crude caricature of where the provision might have come from and recognise that it came from the industry.
Current definitions stipulate that the lowest cost of travel available on an aircraft attracts the reduced rate of air passenger duty. On mixed-class flights, that means that travel on anything other than the lowest class attracts standard or higher rates of air passenger duty. On a single-class flight, only one class of travel is available. Consequently, that class meets the definition of being the lowest class of travel. Travel on those flights therefore attracts the reduced rate. The industry complained that under current definitions, on business class-only flights all passengers meet the definition of travelling on the lowest class available on the aircraft and receive the reduced rate of air passenger duty. In contrast, premium products on mixed-class flights attracted standard rather than reduced rates.
In response to the worry from the industry that classes of travel distorted decisions, the Government announced in the last Budget that they were open to changing the definitions, provided that doing so was broadly revenue neutral and that any change was transparent and simple for Her Majesty’s Revenue and Customs and the industry to operate.
The plans to move to a per-plane duty make it even more important that we do not impose a burdensome change on what is left of the current system of air passenger duty. As the hon. Member for Putney mentioned, a number of options were discussed in the consultation, which was launched on 1 May last year and closed on 1 July. Following the consultation, the Chancellor announced in the 2007 pre-Budget report that changes would be made to the class of travel definitions so that travel on business class-only flights would attract the standard rate, rather than the reduced rate.
In answer to the hon. Lady’s question, that was not the most favoured option by the industry, but it had the benefit of affecting only a small number of carriers. She rightly pointed out that they are not in existence. There were three such carriers at the time of the consultation. Since then, the business class-only carriers have ceased to operate. That may be a dead horse or only a temporary stay. One does not quite know what the market will do, but it is quite possible that business class-only flights will return at some stage. That was why it was felt reasonable to continue with these changes.

Peter Bone: As air passenger duty is to be abolished and the possibility of new business class-only airlines starting up is extremely remote in these economic conditions, what on earth are we doing putting this measure in a clause and debating it?

Angela Eagle: The industry raised the issue with us. It was thought that the different classes were creating distortions in decision making. It seems reasonable that we should level the playing field for air passenger duty even if it has only a year left to run before we move to per-plane taxation—

Philip Hammond: Will the hon. Lady give way?

Angela Eagle: If I can finish the sentence, I will happily give way to the hon. Gentleman.
It is important to realise that operators come and go in these markets. I agree that it is important that any change does not involve a huge burden in changing systems, which is why we went for the option that we did. It makes the least disruptive change, and the simplest and easiest change to the system in the circumstances, especially given the amount of time we have left before the proposed introduction of per-plane duty in 2009.

Philip Hammond: The Minister mentioned the introduction of the per-plane duty in 2009 and referred to this arrangement as having only a year left to go. We are all aware of the hostility of the United States to the proposed per-plane duty. I wonder whether she is able to update the Committee on that issue, and whether there was any discussion of the difference of opinion between the UK and the US during the President’s visit. Has it been escalated to that level of attention, and does she expect that the 2009 change will be able to take place?

Angela Eagle: I am flattered that the hon. Gentleman thinks I would be privy quite so quickly to the discussions that the Prime Minister has just had with the President of the United States. The hon. Gentleman has a flatteringly high opinion of me, but I am afraid that at this moment I am unclear as to quite what the Prime Minister and the President discussed during their tÃªte-Ã -tÃªte yesterday. I promise that I will try to find out for him.
In terms of the revenue impact, an additional £5 million is what was worked out, which, when one looks at the size of the revenues from APD, is broadly revenue-neutral. The industry’s favoured approach, which would have made changes that raised the APD liability of seats on business class-only flights and lowered the APD liability on premium economy seats, would have cost £60 million. That would have been extremely complex to implement and would have resulted in system changes which would have affected a large sector of the airline industry—clearly not a very sensible approach to take with only a year to go of this tax plan.

Justine Greening: The Minister said that the original estimate of the revenue impact was £5 million. I am assuming that that figure is now zero, given that she does not think that the provision will affect any airline companies that are currently operating. Is that correct?

Angela Eagle: I am not certain, and it would be wrong of me to give the Committee a figure, given the changes that there have been in the airline industry. I think that the hon. Lady needs to bear in mind also the implications of the change of premier economy class, which is not completely out of the picture. I am happy to return to the Committee with an updated estimate of the revenue effects of that if one has been done. It is clearly not revenue-neutral to put into being the most popular option favoured by the industry, which would have cost £60 million and been very bureaucratic in terms of system changes.

Peter Bone: I am grateful to the Minister for giving way; she is being extremely generous. I am a little worried about what she has just said, because there should be a zero revenue implication as there are no business class-only airlines now flying. However, I suspect that passengers who are flying economy—such as those people who are sitting in exit rows, or happen to be caught in a seat which has more than a 40 in seat pitch—will now be paying double duty. Can she assure the Committee that that will not happen?

Angela Eagle: The hon. Gentleman used several particular instances of where he thought there might be difficulties, in terms of passengers being upgraded and such. I have to say that, if a passenger has been upgraded when they have not asked to be upgraded, it would be fairly churlish of the airline then to pass on the charge of the APD.
Air passenger duty is charged to the airlines and it is up to them whether they pass that cost on to the customers. I do not know what every airline in existence would do for passengers whom they upgraded in those circumstances, but it would be odd to upgrade and then demand an extra payment, if the individual had not asked to be upgraded.

Justine Greening: I do not want to help the Exchequer Secretary out too much, but can she confirm that the 40 in pitch is in relation to either the seat in front or the seat behind, and that if there is no seat in front it will be based on the seat behind?

Angela Eagle: That is the case. In his approach to the tax, the hon. Member for Wellingborough has allowed himself to be carried away by the consciousness of his height.

Philip Hammond: My understanding is that the defining class is the class of travel that the passenger is contracted to have through his agreement for carriage, not the one that he travels in. Therefore, it seems clear that an upgrade would not necessarily result in a higher charge. Is the Exchequer Secretary aware that it is the practice of some airlines and some brokers or bulk agents of airline travel—or at least it used to be, I do not get much opportunity to travel these days—to enter into guaranteed upgrade arrangements, where one buys a ticket of a certain class on the understanding that it will be upgraded at the point of departure? Has she taken that practice into account, and is she certain that there is no potential revenue loss as a result of such practices being used to avoid the impact of the measures?

Angela Eagle: I suspect that the answer is that there will be no loss, but I will certainly check that we did not miss in the consultation what the brokers might be doing.
There is not a lot else that I can say, especially as someone who is only 5 ft 3 in. [Interruption.]

Frank Cook: Order. Members, please refrain from conducting conversations across the room while a Front-Bench spokesperson is addressing the Committee.

Angela Eagle: I am only 5 ft 3 in, so perhaps Members did not realise that I was standing up. Maybe I should try to shout more to attract attention.

Eric Joyce: I sense that the debate has been whipped into an exciting, high-pitched frenzy over the past five and a half weeks, and so I rise to help my hon. Friend. The exit point that the hon. Member for Wellingborough made was about the class of travel. I have worked out that for his knees to touch the seat in front on an aircraft with a 40 in pitch between the seats, he would need to be just a fraction under 8 ft tall. That strikes me as not quite what his height is.

Angela Eagle: Size sometimes gets exaggerated. The hon. Member for Wellingborough is tall, but he is certainly not 8 ft. I thank my hon. Friend for the mathematics. He has done the Committee a great service.

Question put and agreed to.

Clause 147 ordered to stand part of the Bill.

Clause 148

Stamp duty and stamp duty reserve tax: alternative finance investment bonds

Mark Hoban: I beg to move amendment No. 358, in clause 148, page 90, line 25, leave out ‘paragraph (a)’ and insert ‘paragraphs (a) and (b)’.

Frank Cook: With this it will be convenient to discuss amendment No. 359, in clause 148, page 90, line 41, leave out ‘(6)(b),’.

Mark Hoban: It is a pleasure to serve under your chairmanship, Mr. Cook, and to get these amendments out of the departure lounge and onto the runway. I said to my hon. Friend the Member for Putney that there were insufficient puns in her speech in spite of the ample opportunity, so I thought that I might get one of my own in. The amendments are relatively simple and I do not want to detain the Committee for too long. They relate to sharia-compliant sukuk products.
One of the principles of sharia law is that interest should not be charged on debt, but it is permissible for people to share in risk. In these bonds, there is often an agreement between the person who has issued the bonds and the purchaser of the bonds about the maximum level of return that someone can enjoy on the bonds. The concern raised with me about how those bonds are exempted from stamp duty is that, in some cases, the bondholder is entitled to all of the return on the underlying asset; we will talk about underlying assets in more detail, perhaps on schedule 46. The bondholder is entitled to all of the return, subject to a cap of, say, 7 per cent. My understanding is that bonds structured like that do not get the same exemptions as bonds structured in alternative ways and, therefore, some sukuk products are not treated in accordance with the other bonds. I am keen to understand why that is the case. Amendments Nos. 358 and 359 aim to tackle that issue. The Government amendments in the next group tackle a slightly different set of circumstances, but both groups have the same ends—to ensure that the treatment of these bonds and of more conventional products is comparable.

Kitty Ussher: It is a pleasure as always, Mr. Cook, to serve under your chairmanship.
I am grateful to the hon. Gentleman for his general understanding about what we are attempting to do. The problem is that the amendments he proposes go far wider than addressing the issue that he seeks to deal with.
The amendments remove the condition that the return must not be dependent on the results of a business where the instrument concerned falls within the definition of loan capital that we are discussing. The effect would be that alternative finance investment bonds would not have to qualify for exemption under the loan capital rule at all. Those types of bonds would be afforded more advantageous treatment than their conventional equivalents. They would have a more advantageous position than normal types of debt and loan capital raising, because the conventional equivalents would still need to qualify for exemption under the loan capital rules. Therefore, it is contradictory to Government policy. We are trying to ensure broadly equivalent treatment of sharia-type products and their conventional equivalents.
The amendments would extend the scope of the loan capital exemption to include bonds that have a return based on the results of the business. We think that that kind of return is closer in substance to an equity-like return rather than a debt instrument-like return.

Mark Hoban: Although in principle the Minister is right that the bondholder would benefit from the full results of the business, in these circumstances the bonds are structured so the cap of, say, 7 per cent. prevents them from enjoying those full benefits. Therefore, it moves away from the traditional equity model in which the shareholders are entitled to full rights over the profits.

Kitty Ussher: The dividing line between us is that I think that having a cap involves a greater sense of risk sharing than is appropriate for this type of policy measure. If there is a cap, which is up to X per cent. it is more like an equity-type product than a conventional debt-type product. It is economically different from a product that has a fixed rate as opposed to a cap that can be up to that point. I understand that one member of our Islamic Finance Experts Group has raised that concern and we are happy to explore it in more detail.
We have fundamental reservations about allowing an exemption for products that are not economically a debt-type instrument, even though they are arranged in a sharia-compliant way. To go down the route suggested by the hon. Gentleman looks like a change to our policy. It would also tilt the playing field for sharia-compliant and conventional methods of raising finance to the advantage of sharia-compliant products, which is not fair, so that is another reason to resist the amendment. There is no reason why we cannot explore the fact that there are, we have just been informed, some types of sukuk that have a cap rather than a specified rate of return. We can then deal with the matter in a more appropriate way if we judge it necessary, but accepting the amendment would distort our policy. I therefore urge the hon. Gentleman to withdraw it.

Mark Hoban: I am grateful to the Minister for her explanation of why the Government oppose the amendment. She raises a very important principle as to how these products should be looked at. They are meant to mirror conventional products, not be given advantages over them. We will deal in clause 149 with the way in which the exemptions for sharia-compliant products have then been used for tax avoidance. We must be sure that we do not provide advantages that others can exploit. On that basis, and with the Minister’s reassurance that she will look at this issue, I beg to ask leave to withdraw.

Amendment, by leave, withdrawn.

Kitty Ussher: I beg to move amendment No. 309, in clause 148, page 90, line 41, leave out ‘and (7B)’ and insert ‘, (7B) and (13)’.

Frank Cook: With this it will be convenient to discuss Government amendments Nos. 310, 311 and 312.

Kitty Ussher: These amendments are fairly technical so I will provide the opportunity for questions rather than go through them in detail, although I am happy to do so if there is a demand.

Mark Hoban: It would help the Committee if the Minister gave a little more explanation about the amendment. I understand that it refers to situations in which the interest paid is below a certain rate where there are insufficient profits to generate the rate that people expect on their bonds. That would also suggest that it mirrors equity-like participation, rather than bonds.

Kitty Ussher: There obviously is a demand for more detail about the amendments, so I am happy to provide it. With your permission, Mr. Cook, I will describe the purpose of the clause, then go on to the technical amendments. If the Committee is in agreement, perhaps we can hold the clause stand part debate at the same time.
Clause 148 introduces stamp duty and stamp duty reserve tax rules for alternative finance investment bonds, sharia-compliant versions of which are commonly known as sukuk. The three most recent Finance Acts have introduced rules for direct tax treatment of a number of sharia-compliant alternative finance products. Such products, as we have heard, prohibit the payment or receipt of interest, but pay an alternative finance return instead. The broad principle of our tax rules is to ensure that where a return that is paid to, or by, an issuer or investor is economically equivalent to interest, it should be treated as if it were interest. For stamp duty purposes, that principle is extended so that where a financial instrument is economically equivalent to a debt instrument it will be treated as if it were a debt instrument. Where the arrangements are in substance the same as those for a company raising finance by issuing a conventional debt security, the stamp duty rules will treat the instrument as if it were loan capital, thereby enabling the instrument to be exempt from stamp duty on transfer in the secondary markets.
Some alternative finance arrangements, however, are closer in substance to holding shares in a company or to a profit-sharing arrangement, and the new stamp duty rules will not apply to those types of arrangement. The extension of the definition of loan capital for securities which are classified as alternative finance investment bonds that we are attempting to make will allow businesses and individuals to access a wider range of alternative finance products while helping to create a broadly level playing field between those products and their conventional equivalents for this important and growing market. We are in uncharted territory, and after the Finance Bill was published, we found that we needed to tweak the drafting, because the interaction of the rules in the clause with existing tax rules was not fully anticipated. Our amendments are not intended to change the substance of our proposal at all, but simply to make sure that it is completely watertight.
As for the details, Government amendment No. 309 amends clause 148 to ensure that alternative finance investment bonds may benefit from the stamp duty exemption provided by section 79(7)(b) of the Finance Act 1986 on an equivalent basis to securities raised on conventional terms. Amendments Nos. 310 to 312 amend clause 148 to ensure that alternative finance investment bonds may benefit from the stamp duty exemption provided by section 79(7)(b) of the Finance Act 1986 on an equivalent basis to securities raised on conventional terms. That is achieved by amending the definition of capital market investment and capital market arrangements where the loan capital concerned is raised under alternative finance principles. I regret that we have had to amend the Bill to make it completely perfect, but I hope we have the Committee’s support in so doing.

Amendment agreed to.

Amendments made: No. 310, in clause 148, page 90, line 42, leave out first ‘a right to’.
No. 311, in clause 148, page 90, line 42, leave out second ‘a right to’.
No. 312, in clause 148, page 90, line 44, at end insert—
‘(c) subsections (7B) and (13) also have effect as if—
(i) references to a capital market investment were references to the loan capital falling within paragraph (d) of section 78(7), and
(ii) references to a capital market arrangement were to the arrangements under which that loan capital is raised.’.—[Kitty Ussher.]

Clause 148, as amended, ordered to stand part of the Bill.

Clause149 ordered to stand part of the Bill.

Clause 150

Alternative finance arrangements: power to vary Chapter 5 of Part 2 of FA 2005

Question proposed, That the clause stand part of the Bill.

Greg Hands: May I welcome you, Mr. Cook, to the Chair? I shall speak at some length about clause 151, but first I wish to compare it with clause 150, and ask the Minister a question about one single word. Clause 150(4)(6) includes the words,
“involves the payment of interest, and...achieve a similar effect”.
In clause 151(8), the same phraseology is used, but instead of the word, “and”, the word, “but”, is used. I think that that may change the meaning of the clause significantly and I would be grateful for clarification as to why that is the case.

Kitty Ussher: I am extremely grateful to the hon. Member for Hammersmith and Fulham for raising that point, which appears to be a legal drafting point. If we are moving on to clause 151, with the Committee’s permission, since this question relates to both clauses, I shall answer his question during that debate.

Philip Hammond: On a point of order, Mr. Cook, the Committee will be asked to approve clause 150, and while I understand that the Minister will be better able to answer the question asked by my hon. Friend the Member for Hammersmith and Fulham at a later point, it will clearly not be much use to us if we find that the defect is in fact in clause 150. May I suggest that if the Minister is unable to answer the question that we adjourn for five minutes, to enable her to obtain an answer before we vote on clause 150?

Frank Cook: The question is that the Committee adjourn for no more than five minutes.

Bob Blizzard: On a point of order, Mr. Cook. [Interruption.]

Frank Cook: I stand corrected. I shall suspend the sitting for five minutes.

Sitting suspended.

On resuming—

Kitty Ussher: I am somewhat emboldened now that I have no civil servants whatsoever in the room. I am delighted to be able to clarify the intention of both phrases, which is to achieve exactly the same effect—my understanding is that they are legally equivalent. I will go back and check, and if that proves not to be the case, we will introduce changes to make that intention clear. I hope that that is sufficient for the Committee to be able to agree to the clause, as the phrase in the clause will have the same effect as its equivalent in clause 151. We will make sure that they are the same before Royal Assent.

Greg Hands: I am not entirely happy with that, but we will have to accept it at face value and move on.

Question put and agreed to.

Clause 150 ordered to stand part of the Bill.

Clause 151

Government borrowing: alternative finance arrangements

Question proposed,That the clause stand part of the Bill.

Mark Hoban: I think the Minister may regret using the phrase, “completely perfect”, about the drafting of these provisions. The clause seeks to give the Treasury powers to facilitate the issue of government-backed sukuk bills. I think we are the first non-Islamic country to wish to go down this route. As debate on previous clauses has indicated, there is a grey market for sharia-compliant products for both the retail and wholesale markets, for which London has become a recognised centre.
A number of practitioners in the market have commented on the advantage that a Government-issued sukuk product would offer by providing a benchmark, keeping liquidity, and providing another asset class for investment. However, as we discussed in relation to clause 148, these are not straightforward products, which is reflected in the Government’s response to the consultation on the issuance of Government-backed sukuk products. Clause 150, and schedule 46, will facilitate the Government’s issuance of such products in future.
We identified the complexity of those products in previous clauses, so there is a need for proper parliamentary scrutiny of them. I am disappointed that the Government have gone down the route of secondary legislation, rather than introducing fuller legislation in the Bill, or a subsequent Finance Bill, because there are difficult issues that must be resolved. I would like to highlight them for the Minister, before the Committee considers giving the Government powers to facilitate the issuance of those bills.
The issues were outlined in a Government consultation paper, and the Minister has a copy of the response published by the Government at the beginning of this month, including the draft legislation we are debating today. Clearly, that paves the way for the Government to issue these products. I want to discuss a number of issues with the Economic Secretary so that I can understand the Government’s approach to the regulations, which we will debate in future.
An essential step for private sector companies developing sharia-compliant products is to seek approval from a board of Islamic scholars before they are marketed. The scholars will determine whether a product complies with sharia law. Will the Economic Secretary say whether the Government think that the issue of sukuk products by the Government depends on obtaining approval from those scholars? Do the Government have an alternative route that they could adopt to ensure that products pass the requisite tests in sharia law for the benefit of those interested in buying them?
As was identified in the debate on clause 148, sharia law prohibits the payment of interest, but it permits people to share risk and the returns that come from it. In a conventional bill, holders are paid a coupon, which is straightforward. As I understand this case, the Government envisage a sukuk bill with an underlying lease. In effect, the proceeds from the issuance of the bill will be used to acquire an asset, which will be leased, and the lease payments will provide the return for the bill holders. Will the Minister expand on the type of assets that will form the basis of the lease, given that those assets must be sharia compliant?
The Government’s preferred route for dealing with the issue is to provide sukuk bills, rather than bonds. Bills, by their nature, have relatively short maturities. The consultation paper suggested maturities of one, three and six months. What sort of assets does the Minister expect will be part of the leases? If the Government went down the route of issuing sukuk bonds with longer maturity rates, they might consider including in the lease assets, for example, for private finance initiative projects where, typically, the lease is for a period of 30 years.

Philip Hammond: I am listening carefully to my hon. Friend, who has researched the subject in great detail. He has explained how sharia law prohibits the payment of interest, but allows the sharing of risk. As he has developed his case, I understand that the lessee in the leases will be the Government. Will he explain to the Committee what risk is to be shared when the lessee is a sovereign Government?

Mark Hoban: My hon. Friend raises an interesting point. I will come on to the issue of risks and returns, because one of the challenges faced by the Government and the public sector in designing these products is securing a degree of equivalence. The point that my hon. Friend the Member for Hammersmith and Fulham highlighted under clause 151(8) deals with the point of equivalence.
For people who are seeking to invest, the bills must comply with sharia law, and there must be some risks, which is why the underpinning of the bills by assets is important. For example, on private finance initiative contracts, the operator of the hospital bears some risks on maintenance. The rental stream that they earn is offset by the costs that they incur, so there is some risk. The risk might not be in default—the point to which my hon. Friend the Member for Runnymede and Weybridge alluded—because, on the whole, Governments do not default on bills. However, some operational risk underpins the element of risk in a sukuk bill. If there is no risk, I am intrigued to find out why the Minister believes that the measure is sharia compliant? That is an important point, so I should be grateful if the Minister would make it clear and indicate what type of assets will underpin a sukuk bill issuance? Will she explain what control will be exercised over those assets? The special purpose vehicle will act as the issuer of the bill, as I understand it from the consultation document, and will use the proceeds to acquire the assets which are going to be leased. Who will control the assets while they are owned by the special purpose vehicle?

Philip Hammond: I am interested in the way in which my hon. Friend is developing his theme. The clause provides for money to be raised in sterling or in currencies other than sterling. Presumably, if money were raised in a currency other than sterling, payments made under the lease would have to be denominated in that currency. Is it his understanding that the Government already have the power to make such payments in a currency other than sterling, or are they taking such power? Does he see some dangers to the Exchequer and loss to the taxpayer in going down that route?

Mark Hoban: My hon. Friend makes an interesting point. In their response to the consultation document, the Government deal with the issue of the denomination of the bonds and the payments under those bonds, and they opt for sterling, notwithstanding my hon. Friend’s comments. The enabling clause that we are going to debate in a moment gives them the power to vary between sterling and other currencies. If they make payments in other currencies, we are exposed to exchange rate risk, which would have to be managed.

Greg Hands: This raises a number of important questions. First, as it is likely that a large number of target investors for this type of instrument are based in the middle east, there will be a demand for a US dollar-denominated asset. It is by no means clear whether the UK Debt Management Office in the Treasury would want those dollar-denominated funds. I think we need some clarity as to whether the UK as an issuer would want to keep the US dollar proceeds, or might wish to swap them back into sterling. At the moment, as I am sure my hon. Friend agrees, the whole thing is unclear.

Mark Hoban: My hon. Friend is right. We need some clarity on these matters, which is why I have taken the opportunity in our debate on clause 151 to raise them, as it is important that we know what we are going to approve later on.
The target market for these bills raises an important issue. Having talked to a number of people in the private sector who issue sharia-compliant products, I understand that there is a significant number of such products in the UK. They provide an alternative asset class in which to invest, with the security that comes from being, in effect, a sovereign issuer. There is a certain amount of such investment in the UK, and it may well be the case that there are investors elsewhere who will seek to take advantage of the market, including the City of London, which takes a close interest in these issues and is keen to see London develop as a wholesale market for those products, attracting money from other jurisdictions. It may well be the case that, as the bill issuance programme develops, there will be demand from people overseas. Returning to the issue of denominations, it would be useful if the Minister clarified the Government’s thinking, and explained whether they will seek to use the power to issue bills in currencies other than sterling, and what further obligations that imposes on the Debt Management Office.

Peter Viggers: This clause gives the Treasury the power by regulation to make provision for raising money. Does my hon. Friend know how much further opportunity for debate there would be in the House of Commons, if the Treasury decided to take up the right to make regulations? How would the regulations be debated? Would they have to come before the House, or could the Treasury make them without further reference to the House?

Mark Hoban: I understand that, through either the affirmative or the negative procedure, there will be an opportunity for the regulations to be debated in the House. Of course, that process includes a restriction, as the regulations are not amendable. As this brief debate on clause 151 indicates, there are important issues to be resolved, and different commentators have different views about the applicability of the rules and how they would work in practice. We would be prevented through either the affirmative or the negative procedure from tabling amendments to flush out the Government’s thinking, or to amend the regulations. In an area where there is so much uncertainty and complexity, primary legislation is far better that secondary legislation.
An issue I sought to raise with the Exchequer Secretary, and which came out of the consultation paper, was the cost of the bills to the taxpayer. With conventional products, if there is a big bill issuance programme, the liquidity of markets and people’s familiarity with those products help to reduce their price. However, unless there is a sufficiently large issuance of sukuk bills, there is unlikely to be sufficient liquidity in the market, thus the cost will increase. Government recognise that on page 23 of their response, but they take the view that the price differential would be short-lived. What assessment have they made of the scale of issuance required to bring the price of a sukuk bill in line with that of a conventional one? Will the Exchequer Secretary elaborate on the Government’s comments on the impact of a sukuk product on the conventional bill market? The Government suggest that the cost of that programme would build up to about £2 billion. Does the Exchequer Secretary think that that will reduce the attractiveness of the conventional bill issuance programme, and impair the liquidity of those markets?
I mentioned earlier, in the context of the asset that would underpin the sukuk bill, that there would be a special purpose vehicle, which would issue the bonds and hold the lease to the asset. The consultation paper rightly highlights the issue of who owns that vehicle. That goes back to the comment by my hon. Friend the Member for Runnymede and Weybridge that the shareholder would ordinarily bear the risk. There is a difficult interaction. Traditionally, shareholders bear the risk in that situation, but under sharia law, holders of sukuk bonds need to share that risk if the bond is to comply with sharia law. If the bond holders bear the risk, they expect a higher return, which would make the sukuk product more expensive for taxpayers than a conventional bill. That gives rise to a challenge, because we could find ourselves meeting the demand for sukuk products from retail and wholesale markets, ending up with a bill issuance programme that incurs additional costs for the taxpayer, because the rate of return is higher to reflect the higher degree of risk faced by the sukuk bond holder.

Philip Hammond: My hon. Friend has studied the Government’s response carefully. Is it clear that the motive for the programme is debt management? Is it clear that the Government will proceed only if they can reduce the overall average cost of debt, or is there some other motive that suggests that the Government might issue the bills even if the cost is higher than that of conventional finance?

Mark Hoban: My understanding of the Government’s response is that it is clearly their intention to ensure that the cost of the sukuk bills is in line with that of conventional ones. It is important for the Committee to understand how the Government intend to get there, given the size of the bill issuance programme that they are contemplating, and the need to ensure that the bills are compliant with sharia law, which means that holders must participate in some of the risk. There is a different level of risk for people who invest in an asset and those invest in a sovereign issue, so I am keen to hear from the Minister on that subject. These are important issues.
Another risk arising from bills issued by the Government, as opposed to those issued by others, is that, at the moment, a Government-backed bill attracts a low-risk rating in terms of the capital resources required by a bank. I expect that the Government intend to ensure that the risk attached to sukuk bills is sufficiently low that any bank holding them is not required to hold additional capital. That creates another tension, because if these are meant to be risk-sharing bills to satisfy sharia law, they must therefore have a higher risk than sovereign-issued bills, and carry a greater capital requirement. I hope the Minister understands that tension and will respond to it in her remarks.
An earlier clause dealt with the way in which rules governing stamp duty were being used by companies to avoid paying that duty.As I understand section K of the consultation document, we are in danger of imposing a double stamp duty. Stamp duty will be paid on the acquisition of the asset underlying the lease, and when the lease is sold back to the Government, there will be a further stamp duty charge. That, too, will add to the cost of the measure. Will the Minister clarify the Government’s thinking? Are they content with a double hit for stamp duty, or are they seeking to create a situation whereby Government-backed transactions avoid that double charge? If they can avoid such a charge, does that leave a window open for others to exploit?
I am conscious that I have spoken at some length on an enabling clause, but I think it is an important topic for the Committee to debate. It raises some challenging issues about the cost to the taxpayer of issuance of this nature; about how it will be structured to minimise additional capital requirements placed on banks seeking to hold these issues; and about how we structure the measures correctly so that the right type of assets are included in the underlying lease. It is important to raise these issues now, when the Government are contemplating this as a matter of principle, rather than simply waiting until the introduction of secondary legislation, when we will get into the detail and the mechanics of the measure.

Greg Hands: May I echo many of the concerns raised by my hon. Friend the Member for Fareham and develop some of his arguments? I totally agree with his points about the complexity of the issuance, the potential cost to the taxpayer, and the question of what may, or may not, happen to the non-sterling proceeds of the issuance. With your permission, Mr. Cook, I should like to speak at some length, because I have almost a decade’s experience in Government bond markets and related activities such as derivatives, structured notes and so on, both in London and in New York.
I want to illustrate some of the dangers that the Government may face by providing some examples from past Government issuances of structured notes. There are two things at work in the clause. The first is the Government’s desire to encourage Islamic finance, which is partly a political issue, but it partly a general and laudable intention better to align investors and borrowers, which is part of the well-functioning financial system of a proper financial market.

Kitty Ussher: I am sorry to interrupt the hon. Gentleman when he is just getting into full flow. I look forward to the enlightenment he will provide the Committee from his expertise in this area, but I was just wondering why he said that a desire to promote Islamic finance was a political desire?

Greg Hands: I mean “political” not in a party political sense, but purely in the sense that, almost by necessity, what all Governments do is something political; it is an aspect of public policy.
The second question—and this should be a separate question—is whether the Government should propose that they themselves act as an issuer of a sharia-compliant security, which is effectively a structured note. Traditionally, the United Kingdom, in common with most other western G7 countries, has avoided becoming an issuer of this kind of structured note and finance for reasons which, as I shall explain, have absolutely nothing to do with sukuk or sharia law. I think we need to have a genuine debate about that: it is not just about Islamic finance, but whether the UK Government should become an issuer of structured notes in general, and of sukuk in particular.
I shall explain what a structured note issuer is in due course, but that is what we are proposing in the vaguely worded schedule 46. Although the Government’s intention is to legislate for sukuk issuance, the rules as they stand would allow the issuance of almost anything, as long as it did not have what the bond market calls a coupon, which is an interest payment. Many dangers arise for the UK, not just operationally, but for our standing as one of the world’s best-reputation borrowers in the market.
Sukuk, however we want to look at it, is a form of structured note issuance. It might not belong to the structured notes that grew up in the 1980s and 1990s, when coupons were linked to all kinds of exotic indices and so on, but it is nevertheless structured in a way that determines that those issues are highly unlikely to be liquid, or to be transparent in their pricing. Structured notes are tailor-made bonds or other securities tailor-made for the requirements of an investor, where the cash flows are not typically the kind of liability sought by the issuer. Clearly, Her Majesty’s Government and the Debt Management Office would not normally like to have such a liability on their cash flow. I am not an expert in the narrow, specialist field of Islamic finance, but know rather a lot about structured note issuance. It seems highly unlikely that the Debt Management Office would want to keep the sukuk cash flow on the books, as that would lead, almost inevitably, to a derivative transaction especially, as my hon. Friends the Members for Fareham and for Runnymede and Weybridge have pointed out, if the cash flow is denominated in another currency.
I urge the Minister to provide information and explain whether she expects the Debt Management Office to swap the proceeds. Typically, that would be into some kind of sub-LIBOR funding, which would provide cheaper financing for the Government in theory, but with a number of risks attached, which I shall discuss. So far, the debate on sukuk has focused largely on the needs of investors. I want to talk about the UK’s reputation as a borrower in the market, which is absolutely vital, especially at a time when our volume of issuance—our volume of borrowing—is going up all the time. The reputational risk to the UK could be considerable if we take the route that proposed in clauses 151 and 152, and in schedule 46.
While the Government have taken on the role of providing sharia-compliant investments, the UK’s interests as a sovereign borrower have taken second place in the debate. Sovereign borrowers behave in particular ways in the market. Generally, they behave in a conservative manner, and with good reason: they have reputations and triple-A ratings to preserve. Sometimes in the past they have got things wrong—not, thankfully, in the United Kingdom, but I shall use as an example the Kingdom of Belgium Ministry of Finance, which got into awful trouble about 15 years about by entering into all kinds of structured finance in which it really should not have become involved. It bet a huge amount of taxpayers’ money—tax proceeds—on further exchange rate mechanism convergence, at a time when Belgium was already dependent on ERM convergence. Essentially, it bet the bank on that, and the whole thing went pear-shaped in 1992 and 1993 when the ERM blew apart.
There was an enormous cost to the Belgian taxpayer—not just the pure cost but the damage to Belgium’s reputation as a borrower. I am using Belgium as an illustration, but the position is not exactly the same for the UK, because it will probably swap the proceeds from the sukuk issuance back into sub-LIBOR funding. However, a severely negative impact on one’s reputation as a borrower if one is careless, if not slightly cavalier, in one’s approach to the capital markets could be very telling. The people who made all the money out of the Belgian fiasco were not the Belgian taxpayers who were forced to foot the bill, nor the Kingdom of Belgium Ministry of Finance, which was the issuer, but the banks.
At the time, there were investment bankers in London who, at the end of each year, would calculate three figures: first, how much the Kingdom of Belgium Ministry of Finance had lost that year in its structured finance transactions; secondly—tongue in cheek—the cost that that caused to the Belgian taxpayer; and thirdly, the likely impact on their bonus for that year. I cannot remember the exact figures, Mr. Cook, but they were astronomical. It was the Belgian taxpayer who ended up footing the bill. The damage to Belgium continued for some time.

Philip Hammond: I am listening with fascination to the story my hon. Friend is recounting. This is clearly in large part an issue of scale. Can he indicate what proportion of the Kingdom of Belgium’s debt is raised in this structured finance form? Will he suggest that the Minister might like to tell us whether the Government have any ideas about the proportion of sharia-compliant debt that would be safe to have in the overall mix to prevent the problems he is talking about?

Greg Hands: On the second question, I am unable to provide an answer. On the first question, it was not the Kingdom of Belgium that issued structured notes or raised finance in that way. The Kingdom of Belgium essentially betted the bank on off-balance sheet derivative transactions that were structured in a not dissimilar way to how the structured note market works, often with similarities to sukuk, which I shall come on to later. I was using that as an example to show how a sovereign borrower, not in this case in an example of borrowing, could suffer a very negative impact to its reputation and triple-A credit rating.
Another example at the time, perhaps even more relevant in the issuance of structured notes, was that of the US Government agencies. They were all effectively part of the US Government—Fannie Mae, Freddie Mac, the federal home loan bank system—which were all triple-A rated and going directly into the issuance of structured notes. A lot of these would have extremely exotic structures.
On the face of it, the investor would get a triple-A rated US Government risk, denominated in US dollars—all the same things that we are talking about here today with regard to the sukuk issuance to a UK domestic issuer. However, the coupon or payout on the bond would be linked to an exotic index, quite often a currency exchange rate. It might have been linked, for example, to the deutschmark-peseta exchange rate. Essentially, the investor would be paid a very high coupon in return for taking the risk on an exotic index. It might have been an index of commodity prices, for example. It might have been oil-linked bonds, which I think are going on today. My point is that structured notes have been around for a long time. The sukuk, although having a different motivation and philosophical basis, will have a similar structure.
What happened with the federal home loan bank issued bonds? They were all triple-A rated, issued by a sovereign or quasi-sovereign entity into the domestic market, denominated in US dollars. One could not imagine a more perfect and easy investment for a US domestic investor. Unfortunately, most of the bonds went wrong because the bet that was inherent in the structuring of the bond ended up being wrong. A large number of people in the United States in the early to mid-1990s thought that they had a perfectly safe, triple-A-rated Government investment that would pay a high coupon, but it ended up paying them almost nothing. One might even see parallels with CDOs and CMOs in the US. One could say, “So what? The investors should have been aware of what they were getting into and instead followed a buyer beware policy.”
My only point is that in this case it was not the damage to the reputation of those selling that kind of instrument—the investment banks—that was particularly severe, but the damage to the reputation of the issuer or borrower, which in that case was the federal home loan bank system, also known as the US Government. That reached a particular height in 1995, when an investor called the US army facilities management fund had been investing in a huge number of those securities, which were issued by a separate part of the US Government. The bonds that were issued ended up paying absolutely no coupon at all. The US army facilities management fund was at that time a short-term money market fund driven essentially by post-cold war base closures, and all that those responsible for it had to do was park the proceeds into the money markets until the end of the financial year. However, for reasons only known to them and the investment bank advisers, they decided to bet the proceeds of that on the market through structured note issuance generally issued by the federal home loan bank, which is a different part of the Government. When that reached the front page of The Wall Street Journal, the real damage was done not to the US army, but to the federal home loan bank system as an issuer of those notes, and that greatly concerns me.

Mark Todd: This has been an interesting discussion of an area of policy with which, I must admit, I am not familiar, but I have still not found the relevance of the hon. Gentleman’s points to the issue. Is he suggesting that there is some risk that the British Government might use tools of this kind as a means of raising funds? Some of his examples suggest that that is his concern. Surely that is a matter of public policy, rather than a point about the precise content of the Bill. Or is he concerned about the damage to the reputation of the City and the availability of these products generally? I am not clear what his argument is.

Greg Hands: The hon. Gentleman raises some interesting questions. I think that it is a mixture of all of those. The Financial Secretary told us earlier that those products will be extremely complex—I think she described them as “uncharted territory”. I am suggesting that the UK, as a sovereign issuer of debt, should be extremely careful before getting into that uncharted territory. Secondly, I do not believe that the Islamic or Muslim communities in this country would be the real winners in this or that those lobbying for it have been purely from those communities. Among the biggest lobbyists for such issuance have been the banks, and I believe that that is because the products will be very complex, as the Financial Secretary has already agreed. The big winners from this kind of issuance are likely to be my former colleagues who work in activities related to the Government debt market and in structured derivatives.

Mark Todd: The issue of the regulation of those products will be pursued separately, because that would be an obligation on the Financial Services Authority. We are debating the mere availability of products of this kind within the UK. I leave it to the Financial Secretary to respond, but I assume that, were they to be available, they would be regulated in the normal way so as to protect against any damage to the reputations of both the investors and the wider financial community. The hon. Gentleman, however, may have other assumptions.

Greg Hands: The hon. Gentleman makes a very good point, but history shows that it is extremely difficult to regulate structured note markets, partly because they are so lacking in transparency. It is difficult to price that kind of thing. Often a structured note could only be priced by three people in the world: the person at JP Morgan, the person at Morgan Stanley, and the person at the Union Bank of Switzerland. I have not been able to study the precise structure of sharia-compliant instruments, but, in my view, there is an extreme risk, because the banks are likely to be taking a large amount of money out of those products. Let me take you back to the example in the ’90s of the federal home loan bank system, Mr. Cook.

Stewart Hosie: Does the hon. Gentleman agree that the vagueness of the regulations and the schedule associated with them allow very few people, and yet almost anybody, to be involved? The clause may provide for the involvement of people and for a person to be able to be specified as a body corporate—a company possibly formed only for the purposes of raising money through alternative finance arrangements and maybe independent of the Treasury.

Greg Hands: Absolutely. The hon. Gentleman makes a powerful point about some of the dangers. As he rightly pointed out, both the clause and the schedule are extremely vague. It sounds like the sort of company that might be set up under the regulations would not be dissimilar to a special-purpose vehicle, the like of which has been in the news a lot in the past year. Such a vehicle could issue things like collateralised debt obligations or collateralised mortgage obligations, a large number of assets are parked into a vehicle and the ensuing cash flow out of the other side is what the investor gets. To my mind, there are a lot of similarities between the two products.
With the federal home loan banks’ issuance in the 1990s, there would typically be a small issuance—which I think we are likely to be talking about with these sukuk bonds——of, say, $25 million in principal. I clearly recall being on the trading floor when one of those $25 million structured notes was issued. The bank in question, which I worked for, was proud of itself for having taken a million dollars out of the transaction. That was, and still is, a very lucrative part of finance, and the bank did incredibly well.
Finance profits from complexity, especially from instruments of extreme complexity, where the number of people who can price them can be counted on one hand. Who were the losers in that? After the ensuing swap transaction, the federal home loan banks ended up with sub-liable funding—quite nice funding—of probably liable minus 25, which was very attractive compared with the plain vanilla bond that the federal home loan banks could have issued. The real loser was, of course, the investor.
If the investor had been in a position the next day to put a call in and seek evaluation of that bond independently—regrettably, for the bank concerned, years later that happened—they would have been surprised to find that the valuation the next day, even before the bond had settled, was only 96 instead of their principal of 100, because the bank had taken 4 per cent. out of the transaction. I think that that is the kind of thing that we have to be extremely careful of with structured notes. We may say “buyer beware”—whoever bought that bond should have been aware—but here we are talking about the issuer being the United Kingdom Government, which is where my major concerns come in as a politician rather than as a banker.
We face a reputational risk if we are the issuer of this kind of financial instrument. Sukuk bonds are fine in principle and we want to encourage Islamic finance. As I mentioned earlier, the Government should have an interest in combining matching investors with issuers. Nevertheless, if it would lead to reputational risk for the United Kingdom Government as the issuer of the securities, we need to debate this more clearly. Bear in mind, sometime afterwards the investment bank, or whatever it is that sold the security in the first place, will have long disappeared, but the name left on the piece of paper—that sukuk bond—will be the United Kingdom Government.
It is worth pointing out that there are not that many triple-A sovereign borrowers left: the United Kingdom, Germany, France and, despite the problems in the ’90s that I described, the United States, are all triple-A sovereign borrowers. It is not impossible for a sovereign borrower to be downgraded. Fifteen years ago it would have been inconceivable that Japan could be rated anything lower than triple-A, but it is now a double-A minus rated sovereign issuer.

Brooks Newmark: I have listened to my hon. Friend and it has been hugely instructive, but his examples were, in many cases, assets that were sub-prime, so the underlying assets were at risk and the Government were effectively layering their triple-A security on top of sub-prime assets. What I am not clear about in what the Government are doing and where their argument is going is in respect of where the risk lies with the underlying assets such as with the Federal Homes Association—Fannie Mae, Freddie Mac and so on—and as we have seen recently in the sub-prime market.

Greg Hands: The answer is twofold. First, at least according to the Bill and the two clauses with the schedule, it is impossible to know. It sounds like property might be implied. It says it includes land, but it is not any clearer than that. It sounds to me as though almost anything could be put into that vehicle. The bigger risk, in my view, is that the investor will end up with a pretty raw deal because the bank is highly likely to take out a large amount of money in the middle and we could end up with investors who are very angry with the UK Government, which is something we ought not enter into lightly.
Traditionally, sovereign issuers such as the UK and the Debt Management Office, have been very conservative borrowers. There is a good reason for that. Reputational risk is extremely important in the markets, especially with an issuer like the UK Government, who are about to start issuing rather a lot more gilts and other instruments than in the past. It is vital that we preserve their reputation. The reputation of the UK Government as an issuer in the sovereign bond market is likely to be at risk if we go down the road of issuing structured notes in general and sukuk bonds in particular. The clauses in the schedule in front of us allow us as a Government not only to issue sukuk, but to issue pretty much anything, so long as it does not pay a coupon and does not pay interest. It may even be collateralised on sub-prime assets, which was another point made. I think we should pause, debate what we are looking at here and be careful that what we are getting into is in the best interests of the United Kingdom.

Kitty Ussher: I found that extremely interesting and I defer to the hon. Gentleman’s expertise. I was for some years a country-risk analyst and sovereign-debt analyst for the Economist Intelligence Unit, so I am very aware of mistakes that Governments can make across the world and I can assure him that it is not our intention to do anything remotely similar to the examples he gave. We have not decided whether to issue a sovereign sukuk, we will only do so if we think it is in the overall interests of the UK, including value for money for the UK taxpayer. We would not issue something that we knew had a significant risk premium or had any likelihood of affecting our credit rating—we would have no interest at all in proceeding down that route.

Jeremy Browne: During the speech by the hon. Member for Hammersmith and Fulham, the Minister intervened to ask what he meant by the Government having a political motivation, which he then clarified. Is there a political motivation in what the Government are seeking to do in this field? Do they see potential diplomatic or cultural benefits from going down this path?

Kitty Ussher: No, not necessarily, and that is not the reason we are doing it. I was going to come on to our motivation, because it is important. There are two motivations, one more important than the other. The first and most important is that entering these uncharted waters, as I happily said previously, will enshrine the City of London as an international centre of expertise in issuing sukuk, both sovereign and corporate.

Greg Hands: Does the hon. Lady at least concede that the question of whether the City of London takes a lead on Islamic finance is a different question from that of the UK Government as an issuer of sukuk bonds?

Kitty Ussher: Of course, and it is because the City of London already has a comparative advantage in this area and because deals originating from all over the world are being done through London in this area in the entirely private sector that we wish to give a fillip to that, to the greatest extent that we can, by making the very clear PR and economic point that this is something that the UK Government recognise as important. We want to send out a marker that we wish it to continue.
There is also an extremely important point here about the learning curve that we are rightly being forced to climb to see whether this is in the national interest. We are uncovering little issues here and there around the tax and regulation system that affect not only a potential UK sovereign issuance, but also the corporate issuances that routinely take place. We feel that by working with the industry to address each of these issues as they arise, we will create a more conducive atmosphere for entirely private sector activity that leads to more jobs and greater prosperity in the City of London.

Greg Hands: The Minister mentioned that she was an analyst of sovereign risk, so perhaps she might think back to the origins of most of the important markets in London at the moment, such as the euro bond market. All those are now centred in London and do extremely well. In none of those cases was the UK Government the very first issuer of a new product. Surely, she must see that we can easily separate the future of the City of London from the role of HMG as a borrower.

Kitty Ussher: Of course, an enormous number of things happen in the City of London that have not been done by Government, and we welcome that. But there are other examples of innovative practices that have started off in the public sector, such as methods of trading, for example, IT systems. The point I would make to the hon. Gentleman, and more generally to his party, is that we feel—and there seems to be an extremely broad consensus out there—that the road we are currently travelling, which may or may not eventually lead to a sovereign sukuk issuance, is likely to help entrench London as the world’s leading place for Islamic finance. Given that a number of Islamic countries are currently perceived as emerging markets, and so developing quite rapidly their ability to issue corporate sukuk, we think there is huge potential here to be tapped by London, and now is the time to do it, when our actions could potentially help.

Greg Hands: I thank the Minister again for giving way. She is being generous. Surely she must see that it will not enhance the City’s reputation at all if the bond issuance goes wrong and investors end up out of pocket because the banks have taken too much out of it. If investors have instruments priced at 98 or 99p in the pound the next day, that is likely to do great damage to the reputation of the City of London and that of the Government.

Kitty Ussher: By definition, if a policy goes wrong, it is not a good thing for the Government who have proposed that policy. That is why we have not made a final decision. We will only do this if it is in the broad interests of the British economy and the taxpayer and demonstrates sufficient value for money. If we feel that, once launched, a sovereign sukuk would not be able to attract a return that was in our interest, we would not proceed. We have not got to that point yet, and we need to get as far as we can before making that final judgment. I have an enormous number of points to deal with, and would like to make progress.
I said that there were two main motivations for proceeding in this way, and that the first and main motivation was the boost we felt it would give to jobs and prosperity in the City of London. The secondary motivation is that we feel it may indirectly help the development of Islamic retail products—for example, sharia-compliant high street savings accounts—if the outlet on the high street were able easily to invest in sharia-compliant Treasury bills, therefore ensuring that the entire investment chain is sharia compliant.
That would be an indirect effect, based only on anecdotal evidence, but it fits with our broader policy objective of ensuring that nobody in this country should be denied access to conventional financial products—savings, insurance and so on—simply because of their faith. It is about having a level playing field for the relatively small number of people who currently feel excluded because of their faith, which is by no means all Muslims, it is important to say. I hope that that answers the hon. Member for Taunton’s question. It is not our intention to attract a different class of investor, or—although there may be spin-off effects—to curry favour with a certain sector of society or certain countries around the world. We have two aims and the first and most important is economic, for the City of London.
On the time scale, as the hon. Member for Fareham made clear, we published on 2 June the response to a consultation which did not include a final decision on whether to proceed. There are a number of issues that have not yet been resolved and some of the questions raised today involve issues that have not yet been resolved, so while it is important to take the power in the legislation that is before us, we will not proceed until we have been able to discuss these issues more widely. The final regulations that are brought in, if indeed we decide to proceed—and I think this answers another point that was raised—will be subject to affirmative procedure and so will be debated at that point.

Philip Hammond: To take the Minister back a moment, I have not been following the emergence of this market as closely as my hon. Friend the Member for Hammersmith and Fulham has, but she just said that one of motives of the Government was not that of attracting a different class of investor to UK Government securities. That surprises me. I had always assumed that one of the motives for looking at this initiative was the assumption that there was a class of potential investor, potential buyers of UK Government securities, who felt excluded from that market at present because of faith-based restrictions on the products they could be involved with. That could include domestically based investors as well as potential overseas buyers of UK Government paper. Why does she not regard that as a potentially beneficial avenue, a potentially beneficial source that could be tapped by this initiative?

Kitty Ussher: That is a very important point. As I said when I discussed the indirect effects that could be positive and affect the sharia-compliant retail market, it may be, for example, that a sharia-compliant bank, or a bank offering sharia-compliant current accounts or savings accounts to the British population might find it useful to have the whole investment chain sharia-compliant. In that sense, it will attract a different type of investor. I was thinking more of whether we are trying to tap funds from the middle east and extremely wealthy people who want to invest in sharia-compliant securities. I would be delighted if they wanted to invest in UK plc and they would be welcome to do so, but our research suggests that a slightly higher return is required to guarantee that we would attract that type of investor and we do not think it is in the UK taxpayers’ interests to arrange a product specifically to provide that kind of return. Of course, there is nothing in a sharia-compliant sovereign issue that implies that one has to be a sharia-compliant investor in order to buy it; we did not think it would work because, if we had to offer a higher return in order to attract some of the individuals I just referred to, everybody would want it and so there would be distribution problems.
The most important point is that we aim to ensure that when these products are launched on the market, as far as the end user is concerned, they look the same as any other T-bill. They are obviously structured in a very different way, but we hope to structure it in the least complicated way so that the sukuk, to the end user, does not look any different in risk from a conventional T-bill. That is why we are not going to go for extremely complicated products. I should clarify what I mean by “uncharted waters”. We are in uncharted waters because we have not done a sukuk sovereign issue before, but the actual products we intend to launch, if we decided to proceed down this route are not uncharted waters at all—we are proposing a plain-vanilla ijara structure of the kind that is widely traded internationally and so would not have the potential for margin-grabbing from the institutions and banks that, as the hon. Gentleman mentioned, could take an enormous amount out of it. Our intention is that the products should be completely understood by the market and should have the same risk rating as any other sovereign issue. The British Government are rightly proud of their triple-A rating in that regard.

Greg Hands: I wish I could share the Minister’s confidence that she will avoid banks trying to take out too large a margin from these transactions. The language she is using highlights the dangers here. She was talking about how the bills would look conventional. That is what has happened in the past: people have bought into products where the issuer was a triple-A rated Government. Denominated in their own currency, they looked as safe as houses, but turned out to be anything but. The Minister talked about easily tradable securities. The Government expected a rolling market of about £2 billion in principle of those securities. One of the answers to their consultation said that in order to guarantee a liquid issue, they would need a principle probably in excess of £1 billion. Is she envisaging a large number of pieces of £25 or £50 million, or does she envisaging one or two big benchmark issues of £1 billion? That will make an enormous amount of difference to the likely success of the measure, and especially—to return to a point that I made—to the reputation of the UK as a borrower.

Kitty Ussher: We have not decided precisely the nature—

Greg Hands: Will the hon. Lady give us an indication?

Kitty Ussher: I cannot give an indication, because we have not decided. We are holding a consultation about the nature of a programme of issuance. We think that it would be about £2 billion in total. We want to make sure it is as successful as possible, and we are taking advice on these points. We have not decided whether to proceed, but all those points will become clear if and when we do so.

Peter Bone: The Minister is working hard to explain the Government’s position, but there are many ifs and buts, and a great deal of uncharted water. She has said: “We have not made a decision on that; we are delegating it to regulations and we will bring it in when we think it is in the national interest.” Would it be better not to introduce anything at this stage, and come back next year when Ministers have made a decision? The measure could be debated in Parliament before we go into action. It is not clear why there is a rush to do this now, in such a confusing way.

Kitty Ussher: I am sorry if the hon. Gentleman thinks that I am confusing him. I am attempting to create some clarity and light amid some rather large questions that were raised this morning, and I will do so for as long as it takes. We thought it was simply sensible government to take the power in this year’s Finance Bill. Obviously, if we decide not to proceed with a Government sukuk issuance, that power will not be used. We have not yet decided whether to proceed; we have said that we will decide—or at least give an update—by the time of the next pre-Budget report. If the Opposition wish to oppose the taking of that power, I advise them not to do so, given the huge consensus of support in the City of London for our proceeding as fast as possible. I will continue to attempt to shed as much light as possible on the matter, in the hope that that will reassure the hon. Gentleman.

Peter Bone: I was not trying to imply that the Minister was confusing; I was just saying that the legislation is confusing. I understand that, if the measure is put into practice, it will go through the affirmative statutory instrument process. The problem with that is that we cannot amend it: we have to accept or reject it. That is one of the disadvantages of not doing this through primary legislation.

Kitty Ussher: If the hon. Gentleman thinks, either at this stage, or at that later stage, that we are not doing the right thing for Britain, he is within his rights to reject it. I must say, however, that given that the Debt Management Office routinely issues Treasury bills, on a minute-by-minute basis—that is a completely standard procedure—the idea that we have to debate every single change on the Floor of the House in great detail, together with the ability to amend the measure, could be destabilising. We think that we have done it right: we are having a debate now, and if we decide to proceed, the regulations will be laid according to the affirmative procedure. We are consulting in the open as fully as we possibly can.
Mr. Hobanrose—

Kitty Ussher: I am conscious of the fact that I have an enormous number of questions to answer, so I will give way to the hon. Gentleman, then move on to another question.

Mark Hoban: The Minister referred to the importance of the issuance for the development of the retail market in the UK. What assessment has she made of the appetite for a £2 billion issuance? Are there enough savings in the UK market to absorb bills of that extent, or does she expect that some of these bills will be sold to overseas investors?

Kitty Ussher: We do not mind who buys Treasury bills. We do not think that there will be any lack of appetite for them, compared with other products. One reason why we decided to proceed with a consultation on T-bills, rather than larger gilts, is that we believe that they will be even more liquid, and that demand is extremely well established. I do not know whether that answers the hon. Gentleman’s question.
Mr. Hobanrose—

Kitty Ussher: I feel as if I am going up and down like a yo-yo. I will give way to the hon. Gentleman one last time, and then I will make progress.

Mark Hoban: The Minister has not answered my question. What I seek to understand is what appetite there is among existing UK-based Islamic retail financial organisations for an issuance of about £2 billion. Is there £100 million in savings out there to be invested in the bills, or is it £2 billion, £3 billion or £4 billion? The Government talk about a £2 billion issuance programme. It is important to know what appetite in the institutions the measures aim to help and develop.

Kitty Ussher: It is entirely up to those institutions whether they wish to purchase Government Treasury bills and invest in them. We have not taken the £2 billion and disaggregated it; it is entirely up to the market, which is extremely liquid. We have examined the amount of issuance required to achieve sufficient liquidity to ensure that the bills can be traded easily, as well as demand among investors, which is how we came up with the figure £2 billion, but it would not be right to set a target for the proportion that should come from Islamic retail institutions as opposed to the broader investor base which, thankfully, would happily invest in a large number of Government securities whether they were sharia-compliant or not. [Interruption.] I am going to make progress.
I was asked about foreign currency issuance. It is right that we have taken powers to make payment in foreign currency, but we have no intention of issuing any sukuk not denominated in sterling. We are taking the power more broadly, simply to mirror the provision in the National Loans Act 1968 that gives the Treasury the power to borrow in foreign currency. To put it in context, the Treasury issued a five-year US dollar bond in 2003, but it has not issued bonds denominated in a foreign currency since then, and we have no intention of doing so in that area. It is simply a matter of legal consistency.
The original question posed at the beginning of this debate was how we would ensure sharia compliance. As our consultation document says, there are a number of ways for institutions to ensure the sharia compliance of similar securities. They can use a board of internationally recognised scholars appointed by a bank or other institution; their own board of internationally recognised scholars; or an internationally recognised Islamic standard-setting institution such as the Accounting and Auditing Organisation for Islamic Financial Institutions or the Islamic Financial Services Board.
We have not decided which of those that we will use, but it is obviously in our complete and manifold interest to ensure that the security, if and when we launch it in the market, is perceived as sharia compliant. We will take advice from legal firms and investment banks if we pursue that route on issuance. It is standard practice for advisory firms to approach sharia scholars on behalf of their client, which in this instance would be the Government. We will make our procedure entirely clear.

Greg Hands: What happens if the underlying asset in the vehicle or company referred to in the schedule changes? Surely, that would prompt another assessment of sharia compliance. What would happen if the new assessment said that the bills were no longer sharia-compliant? Presumably, the market would tank and the UK’s reputation as a borrower would again suffer a severe negative impact.

Kitty Ussher: I sometimes get the impression that the hon. Gentleman is trying to talk the measures down. I am not sure that that is in the national interest. I would be interested to know whether, if we solve the problems that he identifies, he would be in favour of proceeding—[Interruption.] The type of asset has not been decided; it will be made publicly known once it is. It will be sharia-compliant, so if we decide to rotate what is in the special purpose vehicle, we will not put anything into it that is not sharia compliant, for precisely the reason that he mentioned. We have no incentive to get into that situation.
On the issue of assets, there has been understandable uncertainty about who will own the asset in the ijara structure if we decide to issue a Government sukuk. The asset will remain on the Government’s balance sheet, and we will keep full control over whatever asset it is. We are simply designing a legal construct that is sharia compliant. Ownership or control of the asset will not be passed over to anybody outside Government. It would not be in our interests to do so.
That point relates to some of our earlier discussions about risk. The measure involves risk sharing, in the sense that an asset is subdivided and used to launch Treasury bills in the market that are backed by that asset. We will not proceed if there is any additional risk. The risk will be exactly the same as that for any other sovereign security that is issued. The sharing comes from using a special purpose vehicle to securitise and subdivide the asset so that there is more than one holder. That is where the sharia-compliant sharing notion comes from. I hope that that answers the questions asked by Opposition Members.
The issue of a double charge for stamp duty land tax was raised. We are aware of that issue, and we announced in the Budget that we will address the problem in next year’s Finance Bill after consultation. The consultation document is due to be published on 26 June.

Mark Hoban: If that issue, which is important in structuring the product, is to be addressed in next year’s Finance Bill, why can we not debate the measure in next year’s Finance Bill?

Kitty Ussher: Because we thought it sensible to take the power now. We wanted to demonstrate to the constituency with which we are working that we are serious about doing this. We also wanted to increase the opportunities for debate, which I would expect the hon. Gentleman to favour.
A point was raised about whether the Debt Management Office will swap the proceeds that it receives from any potential sukuk issuance. I have said that we will undertake only sterling issuance, so the question of swapping the proceeds back into sterling does not arise. I am advised that the issuance of a sukuk will not require the use of swaps or other derivatives. I hope that that reassures the hon. Member for Hammersmith and Fulham even further. While we are in uncharted waters with the possibility of the Government issuing a sukuk, it is not perceived as a complicated product by the end user.

Greg Hands: I thank the Economic Secretary for her generosity in giving way, and I accept her assurance that no swap or other derivative transactions will be involved. May I take her back to some of the costs of the issuance? I think that we are talking about one-month, three-month and six-month Treasury bills, but there has been no appreciation of the cost of setting up those issues. There is presumably a certain cost in ensuring that they are sharia compliant. There is a certain cost to the banks in structuring the issue. A fair amount of cost will be involved in marketing the issues, at least for the first few times. How can all those costs be built in, while still making competitive one-month, three-month or six-month Treasury bills?

Kitty Ussher: If we think that proceeding with this matter is not in the overall interests of the taxpayer, we will not proceed. However, I point out to the hon. Gentleman that there will be huge reputational advantages if we manage to achieve this proposal. It will attract significant business to the City of London, which will lead to increased taxation revenues.
I return to the fundamental point that I made at the beginning of my remarks: we will do this only if we feel that it is in the national interest. We will proceed up to the point where we can have a full understanding, both of all the benefits and costs and of any regulatory changes that are required. When we have the legal basis for proceeding, we will take a final judgment about whether it is something that a sensible Government would do in the national interest. A preliminary indication shows that the potential wider economic benefits are substantial, which is why we are pushing this as far as it will go.

Mark Hoban: At what point does the Economic Secretary believe that the cost to the taxpayer of this issuance, compared with other issuances, becomes so great that it is not worth proceeding down this route? There is a premium to be paid for these bills, which will fall on the taxpayer. At what point does she think that it is not worth proceeding, if there is a premium over conventional bill issuance?

Kitty Ussher: As I have already said, we intend the bills to be perceived by the market as conventional products or as near as possible to that. As I have just said, we will make the value-for-money judgment at the appropriate point and provide an update in the pre-Budget report. I cannot quantify exactly what the relative cost-benefit analysis is because we have not done it yet.

Mark Hoban: I am rather pleased that I have triggered a debate on this issue. It has been interesting.
The Minister’s response troubles me, because a large number of areas have yet to be resolved, but the Minister is seeking in the Bill powers to enable the Government to introduce resolutions to implement a sukuk issuance programme. The work does not appear to have been done to justify the economic benefit of such an issuance.
The Minister began by saying that there were two benefits. The first was to signal clearly to the wider market the importance of developing the UK as a centre for sharia-compliant products. It would be good to see London continue to lead the way, but I am not sure that the Government should driving that through the issuance of products. I accept that the Government have taken steps by presenting the third Finance Bill to create a level playing field on tax matters. That is important, and the Government can continue to take the lead by enabling such change, but that does not necessarily mean that we need to issue sukuk bonds.
The second argument made by the Government was about developing retail products, but the Minister gave no indication that there is a significant retail demand to justify a £2 billion programme of issuance. She made some important points about how we can review all sorts of regulatory and tax issues along the way. I am sure that it will help to facilitate the development of wholesale markets, but I do not think she persuaded the Committee of the economic rationale and the benefits for the taxpayer of pursuing that route. However, she expects us to give the Government powers under this clause and schedule 46 to introduce secondary legislation to facilitate the issuance.
There are important points to be made about the structure and the use of scholars. This is a fraught issue, and I have spoken to a number of private sector providers who have tried to structure products with the help of scholars. They got quite a way down the route, but were then been refused permission, or did not receive agreement from the scholars that those would be sharia-compliant products. It is important to understand how the Government will seek to validate these products as sharia-compliant, as significant issues are attached to the measure.
I am uncomfortable that the Government have not made much progress. The Minister spoke about using legislation in the Finance Bill 2009 to correct the issue of double-hitting stamp duty, which suggests that the Government could have waited until 2009 to introduce the provision and have a proper detailed discussion in advance, so that we, as Parliamentarians, knew what it was we were going to pass into law.

Question proposed, That the clause stand part of the Bill.

The Committee divided: Ayes 14, Noes 9.

Question accordingly agreed to.

Clause151 ordered to stand part of the Bill.

Schedule 46 agreed to.

Clause 152

Power of Treasury to make payments

Question proposed,That the clause stand part of the Bill.

Philip Hammond: One might say that we are going from the sublime to the ridiculous. This part of the Bill is entitled “Miscellaneous”, and now we discover why. Clause 152 is headed “Power of Treasury to make payments”. Some of us might have thought that the Treasury already had power to make payments; it certainly seems to have been doing so for some time. It is a parliamentarian’s delight: wonderfully obscure language. We are going to deal with a situation
“where a financial claim relates to...a case where money is paid into a government account, but the money should not have, or need not have, been paid into that account, or...a case where money should have been, or needed to be, paid out of a government account, but the money...was not paid out of that account, or...was paid out of that account, but not as it should have been, or...needed to be, paid.”

Justine Greening: Might one of those examples be when all those pensioners sent the then Chancellor, now the Prime Minister, cheques in the post for 74p, or however little the rise in pension was that year?

Philip Hammond: My hon. Friend makes an interesting point, and I was going to go on to ask the Minister to explain just what the issue is here. One can easily conjure up visions of somebody discovering in the Treasury that decades—perhaps centuries—after practice began, payments were made that were not properly authorised to be made, or receipts were paid in that should not have been paid in. This is billed as a tidying-up exercise but we clearly need to understand what lies behind it. We are told that there have been cases where types of claims could not be paid under the Treasury’s existing powers, and we are invited to believe that amounts that might have been paid out were not able to be paid out. Clearly something has triggered the clause; something has happened that has drawn attention perhaps to a problem that has existed for a very long time but has only now become apparent.
It does slightly conjure up the tantalising suggestion that amounts that have been paid erroneously into Government accounts have been trapped there for very long periods. Is there some huge pot of money that we are not aware of, indeed perhaps comprised of all the pensioners’ cheques—[Interruption.] The hon. Member for Taunton is right. I do hope so. I spend a great deal of my time looking, largely in vain, for huge pots of money hidden somewhere in the Government accounts. Generally what I find is that detailed exploration yields huge black holes that were previously undiscovered, rather than huge pots of money.

Jeremy Browne: I wish the hon. Gentleman well in his ongoing searches, but I invite him to speculate that the clause may be helpful for the Government as they seek to untangle the mass of tax credits that have been erroneously paid in or out of the various accounts of private individuals.

Philip Hammond: The hon. Gentleman may be right and it may be that the Economic Secretary will tell us that it is the tax credit debacle and fiasco that is at the root of the problem. It might be better if I now listen to her and then respond.

Kitty Ussher: I am sorry to disappoint both the hon. Member for Taunton and the hon. Member for Runnymede and Weybridge, but the need for the legislation is not as a result of either of the issues that they have raised. The best way to characterise it is possibly as “a bank error in our favour” which can then be returned, but the issue does not relate to an amount of money that is in error transferred into a Government account, or indeed in error transferred by anyone to anyone involving the Government estate, which can be returned. There has simply been an odd anomalous historical situation where, let us say, due to a processing error, a large amount of money has been transferred into a Government account by mistake, noticed, rectified and sent back perhaps the next day. If it is a large amount of money, obviously we would have garnered some interest as a result of it remaining in our account overnight. In some circumstances, there has been no mechanism for that interest to be paid back to the person it belongs to. The reason we are addressing the matter now is that—

Jeremy Browne: Will the Minister give way?

Kitty Ussher: Mid-sentence? All right, go on.

Jeremy Browne: I am sorry, I thought it was a semi-colon. The example the Minister just gave may not be a vast amount of money for an individual citizen, but it would nevertheless impact on people who have wrongly had their tax credits transferred to the Government in a way that has been unfavourable to them and who have had to wait before being reimbursed.

Kitty Ussher: I am not in any way implying that the amounts involved in tax credit overpayments are insignificant for the individuals involved. The complete answer to the hon. Gentleman’s question is that the normal HMRC revenue-raising and disbursement operations are not covered by the proposal before us today; it tends to be large institutions or anything involving a bank transfer that we are dealing with. It goes potentially wider, but the proposal does not cover the individual benefit payments that he rightly raises.
The measure before us is simply to create for the public sector an arrangement that already exists in the private sector. If there is “a bank error in your favour” between banks, there is a protocol between banks for resolving the interest payments that land in one institution when they should be in another. There is not a similar protocol within the public sector for simple historical reasons. I was asked, “Why now?” We have had a number of ad hoc cases. By definition, the problem is arising in the private sector—it is giving us money by mistake. It is simply a clerical error and we are giving it back immediately.
I would love to go into details, but obviously it is commercially confidential and would lead to all sorts of excitement if I start explaining which bank has done what. It is not an enormous amount. A couple of cases recently have prompted us to see whether we can work in a more sensible way. There is no Exchequer cost, because, by definition, we were not expecting those amounts to come into the public sphere, so there was no budget for them. The measure before us simply enables us to have a vires for making payments from central funds in order to solve those problems, rather than opening ourselves up to the risk of having to resolve the matter in court, which would lead to an unnecessary legal cost and be a waste of taxpayers’ time. We can do that relatively simply by updating our provisions here.

Philip Hammond: I have two questions. First, implicit in what the Economic Secretary is saying is that this situation has existed for a long period, it was not considered to be material such that it needed to be addressed, and now it has come to be considered material. Does that imply a change in the frequency or magnitude of such errors, because clearly that is the implication? Secondly, although she gave a clear explanation, I think that the whole Committee—I hope it is not only me—will be dependent upon her explanation, because what is written in the Bill could have much wider ramifications. Will she confirm that this is only about the repayment of interest on amounts inadvertently or erroneously transferred and that it goes no wider?

Kitty Ussher: Yes, I can reassure the hon. Gentleman that it goes no wider than that. With regard to why now, I do not know, but it happens that there have been a cluster of occasions when we have had to consider how to pay back the interest from erroneous bank errors in our favour. We have been able to resolve each of them case by case in rather convoluted ways, but the energy required to do so made us think that we should perhaps make life easier for ourselves, so there is no secret agenda to pay money to anyone. With regard to HMRC, I should probably add that it has ex gratia powers to settle such claims, and it is only the central Exchequer accounts that do not.

Peter Bone: Will the Economic Secretary explain the scale of those recent errors? There might have been only a few, but if they are due to IT failures it is important to know whether massive amounts of money were transferred. I know that she mentioned commercial confidentiality, but surely she could tell us how many millions of pounds are involved.

Kitty Ussher: I want to respect commercial confidentiality, but it is probably all right for me to say that the amounts transferred are potentially very large and the interest tends to be tens of thousands of pounds in the recent individual cases.

Philip Hammond: I cannot let that pass without commenting that an amount that has been transferred cannot be potentially very large: it is either very large or it is not. It is probably fair to record that the Economic Secretary has given the Committee the critical assurance that this is narrowly focused and deals only with the specific issue of interest in erroneous payments. That having been clarified, we have no further concerns.

Question put and agreed to.

Clause 152 ordered to stand part of the Bill.

Clause 153

Payments from certain Exchequer accounts: mechanism

Question proposed, That the clause stand part of the Bill.

Philip Hammond: The clause is linked to clause 152 and provides, among other things, that any issue made under subsection (2) in respect of a payment to be made under clause 152
“shall be recorded in the daily account under section 15(5) of the Exchequer and Audit Departments Act 1866”
—one wonders whether it shall be recorded with a quill pen.
I wonder whether there is something more significant here. The clause seems rather long and detailed if all it does is tell us that any payments made under clause 152 shall be recorded in the books of accounts. Perhaps the Economic Secretary will clarify why it is necessary to have this complicated mechanism set out in half a page for what I would have thought could be done with three key strokes on a computer somewhere.

Kitty Ussher: The lesson that I have drawn from today’s debate is that while it was probably useful to have been in a former life a sovereign risk analyst, perhaps I should also have had some training in parliamentary counsel so as to be able to answer the specific legal and drafting points that have arisen. Thankfully, we have people to advise us, and I can reassure the hon. Gentleman that all that clause 153 does is ensure that any payments that are made under the new power to simplify things, as I have previously described, are subject to audit by the Comptroller and Auditor General, as indeed are any payments made by Government. Payments from these funds can generally be made only for services specifically authorised by Parliament via primary legislation, but the Treasury is obviously not required to seek Parliament’s separate approval for every single payment made under the powers.

Philip Hammond: There’s an idea.

Kitty Ussher: We would be here for some time if that were the case. Instead, the Treasury is required to seek the approval of the CAG and his team, who check on Parliament’s behalf that the Treasury is making proper use of the powers to provide the right checks and balances before payments are made, to enable the Treasury to make the payments needed to meet the Government's obligations without undue delay while ensuring that parliamentary control is not jeopardised. Since it is the avoidance of undue delay in the accumulation of interest that we are trying to achieve here, this is a sensible thing. I am sure that the writing of things in a book is now being done electronically, and if the hon. Gentleman wishes to know the exact details, I will be happy to let him know.

Question put and agreed to.

Clause 153 ordered to stand part of the Bill.

Clause 154

Power to give statutory effect to concessions

Question proposed, That the clause stand part of the Bill.

Philip Hammond: This is a more substantive issue. The clause introduces legislation enabling existing HMRC extra-statutory concessions to be made into statutory provisions by the issuing of a Treasury order. In other words, tax law will be made by statutory instruments rather than by primary legislation. While statutory instruments are extremely useful and have a role to play, particularly in this kind of detailed, technical legislation, as my hon. Friend the Member for Wellingborough pointed out this morning, they have the major disadvantage of being unamendable. The clause proposes that the Treasury or HMRC will be able to propose that an existing extra-statutory concession be given statutory effect with such amendments as they see fit, but Parliament will not have any opportunity to add its own amendments, even, for example, to remove Treasury or HMRC amendments so that the extra-statutory concession is given statutory effect in the form in which it has in fact operated for many years.
Existing extra-statutory concessions normally give relaxations in tax liability to which taxpayers would not be entitled under a strict interpretation of the wording of the legislation. They are usually introduced on the grounds of fairness, where it has been discovered that an unintended consequence arose, or for administrative simplicity, for example where a class of taxpayer would have to be pursued for a trivial amount of tax in a way that does not make any sense for anyone, or for clarification of poorly drafted legislation.
There has been effort in recent years increasingly to put extra-statutory concessions into statute, mostly through the tax law rewrite process. I am told that the famous example, much beloved of accountants, is the Christmas party exemption, which is now enshrined in section 264 of the Income Tax (Earnings and Pensions) Act 2003, but previously had effect as an extra-statutory concession. It could be called the “anti-Scrooge” concession, and waives the usual prohibition on tax-deductibility of entertaining expenses in the case of reasonable entertainment of staff at Christmas.
During the case in the House of Lords of R v. Her Majesty’s Commissioners of Inland Revenue applied for by Adrian John Wilkinson, it became apparent that HMRC’s powers to make extra-statutory concessions on the strict application of the law were not as wide as had been understood. The case established that HMRC has discretion under section 1 of the Taxes Management Act 1970
“to formulate policy in the interstices of the tax legislation”.
Although it is not for me to criticise the judgment, I would have thought that it would be for HMRC to interpret rather than to formulate policy in the interstices of the tax legislation. The judgment goes on to say that HMRC can formulate policy
“dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time.”
One sometimes sits in Committee and is moved to wonder what a disproportionate amount of parliamentary time would be. The judge clearly thought that there was such a concept. Crucially, the judgment established that HMRC’s powers under section 1 of the Taxes Management Act 1970 could not be construed
“so widely as to enable the commissioners to concede, by extra-statutory concession, an allowance which Parliament could have granted but”
had not granted. Since Parliament could have granted anything, I take that to mean that an extra-statutory concession cannot be used to give a concession to a taxpayer that Parliament could reasonably have anticipated could have arisen and that Parliament could have given but chose not to, because either the Government or the Opposition of the day chose not to bring forward such a concession. My layman’s understanding is that HMRC’s powers are thus restricted to dealing with the unforeseen, the unenvisaged, the trivial and the minor, rather than creating any new significant provisions.
Hopefully the Minister will be able to give us an update, but I understand that HMRC is reviewing the legality of all currently operational extra-statutory concessions. The Committee will be interested to know how many of them there are and whether HMRC still expects to complete that review in autumn 2008. Since seasons in Government-speak often have a non-intuitive meaning, for example the spring normally ends when Parliament rises for the summer recess and the autumn has been known to run till the Christmas recess, could the Minister clarify, in calendar-speak, when we can expect that process to be completed?
In summary, the point is that extra-statutory concessions had become a lazy answer to the problems of slack drafting and gaps in tax legislation. To that extent, we acknowledge that clause 154 is a practical measure to ensure that concessions relied on by taxpayers and HMRC can be preserved. That is proposed to happen through a Treasury order to give the concessions statutory effect. Therefore, they cease to be extra-statutory concessions and become statutory provisions. Will an extra-statutory concession that falls foul of the Wilkinson judgment be able to be enacted under the clause? Clause 154 (2) defines an “existing HMRC concession”. What if the concession was ultra vires ab initio? I assume that that is the effect of concluding that a concession contravened the provisions of the Wilkinson judgment.

It being One o’clock,The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.